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Online giant Uber clashes with offline taxi world

Companies like Uber, airbnb and Netflix illustrate the challenges between existing regulators and new offerings.

This week, Toronto announced it was headed to court to block Uber and all its affiliates from operating here, though it first set up shop in March 2012. (Raffi Anderian / Toronto Star) | Order this photo

Need a ride to work? Looking to rent a condo for the weekend? Want to make some extra cash?

New avenues are rapidly opening up to match end users with service providers. With a few taps on a smartphone application or clicks on a website—you can get the service, all for a price, charged to your credit card. Or you can supplement your income by renting out your home or by driving people around.

As these online innovators, which call themselves intermediaries and not direct service providers, enter the real-world marketplace, it begs the question: Do they need to play by existing rules and regulations?

The City of Toronto thinks so. This week, the city announced it was headed to court to block Uber and all its affiliates from operating here, though it first set up shop in March 2012.

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Uber isn’t a small startup. It has a valuation of $17 billion (U.S.) and is said to be considering another funding round to raise another billion dollars or so.

Some drivers are licensed cabbies or limo drivers, while others may just be somebody looking to make some extra cash with their own car, which authorities have warned may violate insurance policies.

“This is definitely tension between new and old,” said Joshua Gans, Skoll chair in innovation and entrepreneurship at Rotman School of Management. “It’s a tension between entrenched interests and how we evolve regulations.”

While Uber is getting much of the attention — other companies are also trying to shake things up. Airbnb is a giant company that offers up vacation rentals and has run into troubles in some cities over tax revenues.

Similarly, Netflix, the U.S.-based online video streaming service, has clashed with Canadian regulators, in what is traditionally a heavily regulated industry, subject to Canadian content rules.

But Netflix has refused to disclose subscriber data to the Canadian Radio-television and Telecommunications Commission. Rivals and some governments have argued Netflix needs to be regulated and forced to contribute content production funds.

But the Harper government has warned the CRTC that it will reject any attempt to create what it has dubbed a “Netflix tax.”

Regulators around the world have insisted Uber needs to play by the existing rules. Uber has disagreed, flouting laws repeatedly, on different continents.

It has also come under criticism from users over its surge pricing systems — where fares increase when it’s busy, such as during a storm or on Halloween night. Uber says it’s a way to get more drivers to a certain location.

Drivers in some cities have also banded together to fight Uber, organizing protests and formal associations, complaining about cuts to fees paid or getting fired for poor service ratings.

Since arriving in Toronto in 2012, Uber has firmly insisted it is not a taxi company, but rather a technology company, therefore not subject to licensing rules.

The city thinks otherwise and slapped Uber with 36 bylaw infractions, but none of the cases has been heard in court yet.

In seeking a court injunction, Tracey Cook, the city’s executive director of municipal licensing and standards, says Uber is operating in “flagrant disregard” of the laws of the city and the province.

“By its actions, it is the city’s opinion that Uber is jeopardizing public safety, including that of individuals they are recruiting as drivers,” she said at a Tuesday news conference.

The action comes two months after Uber launched its UberX service that lets ordinary people use their personal cars to ferry people around.

Rules governing taxi licensing and hotels have been around for a half century, so Rotman’s Gans said it shouldn’t be a surprise that “maybe they don’t accommodate the current situation.”

Gans, who has used both Uber in Toronto and UberX in other cities, believes regulators should consider adjusting laws, “while making sure you don’t stifle innovation by tying things up for three years.”

That’s mayor-elect John Tory’s position. He came out almost immediately against the city’s chief licensing official, saying this new technology isn’t going away.

Taxis are big business — with hefty fees for brokerages to operate and for individual taxi licence plates. The city estimates taxis generate $1.62 million in fare revenue in a day.

And the city argues its licensing process is rigorous, requiring every applicant for a taxicab driver’s licence to pass a 17-day training course, arguing it is uncertain about Uber’s screening process.

That doesn’t appear to deter Uber, whose business strategy is to move into a city, ignore the regulators, promising customers cheaper rates and drivers higher pay. Some speculate that Uber wants to get so big that governments won’t be able to stop it.

Uber Toronto’s general manager Ian Black says he remains hopeful that the company and the city can reach some framework agreement to operate here, noting ride-sharing is now permitted in more than a dozen U.S. jurisdictions such as Chicago, Houston and Washington, D.C.

While Uber intends to fight the injunction application, Black hopes the new city council will consider adopting new regulations, adding Uber has already reached out to all councillors as well as Tory.

“I think ultimately, this isn’t going to be solved in a courtroom,” he said.

“This is going to be solved at city council by looking at what the benefits are for the city with ride sharing, and what are the things we want to make sure are protected.”

Gans believes that getting rid of the gray areas might actually help businesses thrive, and governments may benefit through more tax revenue.

While the city hasn’t had any complaints about vrbo.com or airbnb, where home owners can rent out the houses, rooms or a couch to visitors, in some jurisdictions, rentals may be subject to tourist or occupancy taxes.

“One can imagine there are times they are useful to tourism in the city when hotels are full,” Gans said, such as during the Gay Pride parade or Pan Am Games.

He added traditionally some businesses like taxis operate on cash only basis, leading to lost tax revenues for governments through the underground economy.

Given Uber operates on credit cards only, Gans said it could be giving revenue authorities new information. “There may be nothing. It’s not clear to me that the regulation is a one-way street,” he said.

Gans, who has called an Uber taxi to pick up his 12-year-old son from school, likes the transparency available on the app including driver’s name, licence plate and contact information, as well as a rating system.

“I had an extra level of monitoring afforded by the Uber app,” he said. “I could see where it was. In fact, I texted the driver to tell him he was picking up my son,” he said.

“There was no way I would have told my son to go out and hail a cab,” he said. “For teenagers, you can say, come home by Uber. You don’t have to worry about cash. I will get to see exactly where they went.”

John Mascarin, a municipal lawyer at Aird and Berlis, says there is always a time lag between regulation and anything that evolutionary.

“That’s when you realize there’s a problem, and let’s try to fix it,” he said. “With technology it’s hard to be pro-active, because you don’t know how it’s going to work.”

He pointed to email, which emerged as a great way to communicate. But Mascarin said people did not immediately realize that spam emails would become an issue, eventually requiring anti-spam legislation to regulate emails.

“You could have free entry and offer ride services,” he said, arguing the companies would scrutinize the drivers and their vehicles for safety.

“Companies like Lyft, Uber, Sidecar invest a lot of money in their reputation. They will not go for drivers who are bad drivers.”

He said the rating system where consumers weigh in will essentially wipe out bad apples, comparing it to eBay where shoppers steer clear of sellers those with bad reviews. And if they are fake reviews, consumers will find out, he said.

Instead, Geloso said cities should come up with a way to compensate holders of taxi licences or plates for their hefty investment or buy them back, Geloso said.

William Mitchell, a professor of strategic management at the Rotman School of Management, compares the Uber fight to the battle over downloading recorded music in the past.

“A business model designed around suing your customers is not very sustainable,” he said. When Apple came along with the iTunes system, Mitchell said it worked because customers were willing to pay, especially because no piracy was involved, and artists and recording labels got a portion of the proceeds.

“I think what we are going to end up with is a different model for transportation,” he said. “If we try to regulate it under the same tools that we used to regulate the old business world, it won’t work.”

The taxi business is a powerful lobby in every city in which it operates, he said.

Mitchell argues the city needs to be concerned about public safety as well as city revenues, but it shouldn’t be protecting taxi companies.

“I think trying to protect an industry that may be fading is at best hopeless, at worst, counter-productive,” he said.

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